Vice-President of the European Commission responsible for Competition Policy

"Competition v Regulation: where do the roles of sector specific and competition regulators begin and end?"

Figures and graphics available in PDF and WORD PROCESSED

Center on Regulation in Europe (CERRE)

Tuesday 23 March 2010, Brussels

It is a pleasure to be here today at the Center on Regulation in Europe.

The purpose of this seminar is to discuss the different roles of competition policy enforcement and sector regulation. The European Commission is in an interesting position in this debate since it both enforces EU competition policy and develops sector regulation at EU level.

In many ways I believe that this dual role is one of the Commission's strengths. It helps ensure that competition policy objectives are taken into account in developing sector regulation.

Essentially, the Commission's objective is to ensure that markets work well for the benefit of business and consumers, whether through competition or, where necessary, through regulation. When markets work well, companies provide customers with more choice, lower prices and better quality goods and services. This is key to the Commission's vision of a social market economy for Europe in the 21st century.

Why competition policy?

For markets to work well, we need effective competition. This is where competition policy comes into play. We can prevent mergers that will significantly reduce competition on the market, put an end to cartels or stop companies from abusing positions of dominance to the detriment of consumers. Or indeed, we can ensure that Member States do not distort competition on the market through state aid.

Competition also drives companies to be more efficient and encourages them to innovate. This enhances their competitiveness at home, in Europe, and worldwide. In turn it will boost productivity and growth, and create jobs.

For this reason, competition policy is fundamental to the Commission's new Europe 2020 strategy for achieving a new period of growth and dynamism in Europe.

Why regulation?

Regulation can serve a number of purposes.

Its aim might be to secure specific policy outcomes on a market – such as reducing pollution, ensuring security of energy supply, providing an essential but uneconomic service, or protecting vulnerable consumers.

Or, to take a topical example, regulation may be necessary to supervise a sector such as the financial sector, where market failures can have a devastating effect on consumers, but also a systemic effect, with repercussions beyond the interests of those immediately affected.

These different regulatory objectives will sometimes cause tensions with competition law but I would argue that in the majority of cases competition instruments and regulatory instruments are actually complementary.

Sometimes, regulation is actually used to open up markets to competition, as an instrument of liberalisation. This is typically the case in network industries, often former state-owned monopolies, such as telecommunications, transport and energy, but also postal services. Experience has shown that it is not enough to lift legal monopolies, and to rely on individual enforcement of the competition rules. In order to guarantee a competitive environment in which new entrants can thrive, regulation is necessary.

Not least because many of our competition enforcement instruments rely on ex post enforcement. Sometimes ex ante regulation is preferable to resolve structural problems and open up markets to competition by laying down the conditions for market entry, giving potential new entrants legal certainty and thus encouraging them to invest.

How competition policy and sector regulation interact

Complementary instruments

Competition enforcement and sector regulations are complementary instruments. They work together to achieve markets that work well.

The financial sector shows that the relationship between regulation and competition is not necessarily antagonistic. On the contrary, reasonable regulation can be a valuable tool to facilitate competition and a level playing field between competitors.

The financial crisis demonstrates very clearly how a lack of effective regulation created incentives for financial institutions not to compete on the basis of the best long-term business models. Rather they were incentivised to pursue excessive risk-taking in order to achieve short-term gains.

To make matters worse, there was no regulation enabling the orderly winding up of banks without endangering financial stability. This meant that an essential principle of competition – the exit of inefficient non-viable players from the market – was not operational. Member States were forced to rescue banks by injecting large amounts of State funds in order to prevent a financial meltdown. It was only because of the State aid rules that we were able to avoid the massive distortions of competitions that would otherwise have resulted.

This is why the current efforts to better regulate financial institutions – amongst others through more appropriate capital requirements, better supervision and the creation of adequate resolution mechanisms – do not run counter to the aims of competition instruments. Quite the opposite, they should create a framework for better competition, without the need for State support to remedy market failures.

The telecommunications sector is a great example of regulation and competition working hand in hand.

It is typically the sort of industry where ex ante regulation has been a necessary complement to competition enforcement, because there are enduring economic bottlenecks, namely non-replicable legacy facilities. So regulation of access to networks has been necessary to allow market entry.

But regulation is being progressively phased out, as competition in the market develops. Ultimately electronic communications will be governed by competition law only. Under the current EU Regulatory framework for electronic communications, regulation is the exception rather than the rule. The Commission, alongside national regulatory authorities, has a role to play in ensuring that regulation is only imposed where it is necessary.

For instance, the Commission recently ruled that Polish telecoms regulator UKE should withdraw its plans to regulate the markets for internet traffic exchange services in Poland. The Commission took the view that UKE had failed to show that competitive conditions in Poland require the regulation of these markets, which are not regulated elsewhere in the EU. The Commission's view is that Polish consumers already benefit from competitive services without the need of an extra regulatory burden. The

Commission considers that if these markets were regulated, it could adversely affect alternative operators offering transit services and discourage them from investment in network infrastructure.

But of course, ex ante regulation is still necessary where structural competition problems persist. So that the roll-out of a new technology – for instance fibre networks for New Generation Access – does not let incumbents off the hook. Dominant companies will have to provide access to their fibre network, as they do to their copper network. Dominant companies cannot be allowed to leverage their ownership of ducts and fibre to monopolise new broadband services, or to re-monopolise telecoms markets as a whole.

Regulation works best when it takes into account competition objectives

The Commission's experience with sector enquiries under the competition rules, market studies and competition law enforcement have also been key to developing effective regulation in the energy sector.

The detailed analysis of the competitive situation on the energy markets in Europe carried out between 2005 and 2007 in the context of the energy sector inquiry enabled the Commission to open a large number of competition cases in the energy sector in the last years and to achieve significant remedies.

The remedies in some of these cases even include so-called “structural” remedies such as the divestiture of gas and electricity grids. For instance, in November 2008, the German electricity provider E.ON agreed to divest generation capacity and network assets.

The remedies in the Commission’s antitrust cases address concrete competition concerns in individual investigations, but the sector inquiry also helped the Commission to better identify shortcomings and loopholes in the regulatory framework in place and to develop adequate regulatory solutions.

Many improvements in the recently adopted "third legislative package" for achieving the internal energy market, can be directly linked to the findings of the sector inquiry. These include provisions to ensure effective "unbundling" (i.e. separation of network activities from commercial activities), measures to support cross-border integration of energy networks, and improvements to regulatory oversight.

We are currently continuing work on a sector inquiry into pharmaceuticals, which raises issues relating to the interaction between competition and regulation. Some individual competition cases have already been opened. But the preliminary findings of the inquiry also reveal regulatory issues that are affecting competition between generic manufacturers of pharmaceuticals and "originator" companies. These include the lack of a Community patent, and the operation of national rules concerning pricing and reimbursement of pharmaceuticals.

Regulation does not preclude competition enforcement

Regulation, even though it may be essential to open up sectors where there are persistent, structural market failures, cannot help companies evade competition law. Ex ante regulation can reduce the risk of competition problems, but cannot completely eliminate it. Dominant firms have been known to find ways to circumvent ex ante rules. This is why there is and always will be room and indeed a need for competition enforcement.

In a regulated market, companies may of course argue that they are bound to comply with certain rules or a regulator's finding. But if there is a competition problem and the company has the power to amend its behaviour, there is room for competition enforcement.

In its 2008 judgment in the Deutsche Telekom case, the EU's General Court ruled that even if the national regulator had considered the compatibility of Deutsche Telekom's behaviour with Article 102 (which it had not), the Commission cannot be bound by a decision taken by a national regulator.

The Commission's 2007 Telefónica decision is an excellent example of antitrust enforcement in a regulated market, the market for wholesale broadband access (or bitstream access) in Spain. The Commission found an abuse which consisted in a margin squeeze amounting to a refusal to supply. During the period of the abuse Telefonica's market share was stable, and Spanish consumers suffered (Spain's retail prices for broadband access were among the highest in the EU-15 Member States).

The competition analysis we carry out takes account of regulatory context and objectives.

A good example is our review of the recent merger between Deutsche Telekom's and France Télécom's UK subsidiaries, T-Mobile and Orange.

The analysis of the competition issues in this merger case could not have been carried out in isolation. We needed to take into account the regulatory environment, and in particular spectrum allocation.

The remedies obtained in the merger procedure will have also to be factored in by the UK regulatory authorities, when designing the forthcoming spectrum auction.

In this case the Commission cooperated closely with the UK telecom regulator OFCOM and with the Office of Fair Trading.

We benefited from OFCOM’s technical expertise and thorough knowledge of the dynamics and regulation of the British mobile telephony market.

This close cooperation proved essential to achieve our common goal, of maintaining competition in mobile telephony in the UK, for the benefit of consumers.

What really matters – close cooperation

I think that all this demonstrates that the relationship between competition policy and regulation is complicated, even though I do not see it is as being in conflict.

For competition and regulation to play their essential, and complementary, roles in making markets work for consumers, there needs to be close cooperation between regulators and competition law enforcers.

The key is to ensure that we achieve consistency – and continuity, notably in markets where we are achieving a shift from ex ante regulation to ex post control – but also in markets where regulation and competition enforcement can be expected to coexist for some time yet.

And again, whether or not regulation exists, growth in Europe will come from innovation and efficiency, and therefore from effective competition in the internal market.

More generally, and even when we are talking about regulation which seeks to achieve other public policy objectives, it is important to bear in mind that regulation which creates distortions of competition is never in the interests of consumers. For this reason I see competition advocacy – i.e. ensuring that competition principles are taken into account when regulation is being prepared – as an important part of my role.